The Kenya Revenue Authority (KRA) has handed relief to workers after it ended a series of back-to-back raises on the tax rate charged to employers granting welfare support.
In the latest decision, the taxman has retained the fringe benefits tax at nine per cent for the next three months until March—ending two consecutive raises for the six months to December last year.
This is on account of the prevailing high market interest rates—the second such raise in more than a year.
The fringe benefits tax is a levy imposed on employees receiving extra welfare benefits such as cheap loans in addition to their wages.
“For the purposes of Section 12B of the Income Tax Act, the market interest rate is nine per cent. This rate shall be applicable for the three months of January, February, and March 2023” KRA said.
The fringe benefits tax had been retained at seven per cent across 2021 until the quarter ended in June last year when KRA raised it to eight per cent for the three months that ended in September. The tax was then raised to nine per cent from October to December 2023 on account of the prevailing high market interest rates.
Fringe benefits
Taxable employment income in Kenya includes all payments made by an employer to an employee. This will include salaries, wages, bonuses, and fringe benefits received or enjoyed during employment.
At the same time, the taxman has retained the deemed interest rate at nine per cent for the three months to March of which a withholding tax of 15 per cent would be deducted and paid to it by the 20th day of each month. The deemed interest rate had been raised to nine per cent for the three months to December.
The Monetary Policy Committee of the Central Bank of Kenya (CBK) in November raised the base lending rate for the second time in a row to discourage borrowing and thus tighten spending.
It raised the CBR by 50 basis points to 8.75 per cent up from 8.25 per cent. It was the first consecutive increase in the base lending rate this year after the CBK raised the rate in September to 8.25 per cent up from 7.5 per cent.
CBK Governor Patrick Njoroge attributed the decision to sustained inflation amid continued global risks that could unleash further negative impacts on the local economy.
“The Committee noted the sustained inflationary pressures, the elevated global risks, and their potential impact on the domestic economy and concluded that there was scope for a further tightening of the monetary policy in order to anchor inflation expectations,” he said.
Curb inflation
And now the IMF wants the CBR raised further to curb inflation and help deal with the effects of foreign currency shocks.
“The Central Bank of Kenya’s (CBK) monetary policy stance is welcome. Further tightening would limit second-round effects and keep inflationary expectations well-anchored while supporting external adjustment” the IMF said in a statement last month.
“The exchange rate should function as a shock absorber, supported by a well-functioning interbank FX market, with forex interventions (sales) limited to addressing excessive volatility. Continued monitoring of the banking system is also important” it added.
A further tightening of the CBR could hit borrowers as more banks began adjusting their lending rates following the November raise.
One lender, NCBA Bank has already notified its customers of the higher interest rates that will take effect on January 6 next year.
The bank has raised the base lending rate for its Kenya shilling-denominated loans to 11 per cent from 10 per cent and its dollar-denominated loans to 10 per cent from 9 per cent. BY DAILY NATION